Transcript Productivity Growth in the US and EU: Possible Lessons for India?

Productivity Growth
in the US and EU:
Possible Lessons for India?
Robert J. Gordon
Presentation at
Sixth Annual NBER-NCAER
Neemrana Conference,
January 17, 2005
Income per Capita:
Ultimate Measure of
Economic Success
Power of Compounding: The “Rule of 70”
– 1.3% growth, doubles every 53 years (Philippines)
– 5.8% growth, doubles every 12 years (Korea)
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For very long-term growth or comparing rich and
poor nations, Income per capita and productivity
are the same thing
Not the same thing for short-term changes or
comparisons among rich nations
– Even in an application to poor nations the distinction
between consumption welfare and productivity matters

(Rob Feenstra on the terms of trade)
Income per Capita vs.
Productivity: Central to
Understanding the US vs. EU
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The ultimate goal of economic policy is
growth in output per capita (Q/N)
Productivity is output per aggregate
hour worked (Q/A)
Growth in output per capita differs
from productivity when hours per
capita (A/N) change
How Could Europe be
So Productive Yet So Poor?
Output per Capita (Q/N)
In Europe 75% of U. S.
(failure to converge)
Productivity 95% of U. S.
The Difference:
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
Hours per Employee (A/E)
Employment Rate (E/L)
Labor-force Participation
Rate (L/N)
Q

N
Q A E L
  
A E L N
Rich vs. Poor Nations:
Solow Model Predicts
Convergence
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Technology is Freely Available
All that Holds Back Poor Nations is
Low Capital-Labor Ratio
Marginal Product of Capital is MUCH
higher in Poor Countries
Implies Universal Convergence
Cross-Country Data:
Solow Model Makes a Strong
Graphical Prediction
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Convergence Implies the Poorest Nations
Grow Fastest
Look at data over a long period, 1960-2000
Plot Initial Q/N on the horizontal axis (as a
percent of the U. S.)
Plot Subsequent growth on the vertical axis
Strong prediction that the plotted points
across all countries should have a negative
slope
The Failure of Convergence,
1960-2000 (PWT6 data)
Convergence in Large
Asian Nations, 1960-2000
Average Growth, 1960-2000
U.S.
South Korea
China
Japan
1
Indonesia
Pakistan
India
Bangladesh
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
1960-80 vs. 1980-2000:
India Does Much Better
Average Growth, 1960-1980 and 1980-2000
U.S.
South Korea
China
Japan
Indonesia
Pakistan
India
Bangladesh
-0.01
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
Level Relative to U. S.,
1960 and 2000
South Korea
China
Japan
Indonesia
Pakistan
India
Bangladesh
0
10
20
30
40
50
60
70
80
How Can Europe be So
Productive Yet So Poor
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The History: Europe falls back 18701950 and then catches up
The catch-up, at least until 1995, was
almost complete in productivity (Q/A)
The catch-up petered out in output per
capita (Q/N)
Why?
– Must be that Europe’s A/N is lower
– When did Europe’s A/N decline?
– How is it decomposed, A/E vs. E/N?
The Following Graphs are
Based on a NBER WP
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“Two Centuries of Economic Growth:
Europe Chasing the American Frontier”
How to Find this and other of my papers
and conference presentations:
Just type “Robert J. Gordon” into Google
Don’t type “Robert Gordon” which will give
you Robert Gordon University in Scotland
Per Capita Real GDP:
Another Failure of
Convergence
per Capita Real GDP, Europe and the United States,
Selected Years, 1820-2000
Constant 1990 Geary-Khamis Dollars
100000
10000
United States
Europe
1000
1820
1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Real GDP per Hour
Real GDP per Hour, Europe and the United States,
Selected Years, 1870-2000
Constant 1990 Geary-Khamis Dollars per Hour
100
United States
10
Europe
1
1820
1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Output per Capita
and Output per Hour
Ratio of Europe to the United States,
Output per Capita and Output per Hour,
selected years, 1820-2000
110
100
90
Output per Capita
Percent
80
Output/Hour
70
60
50
40
1820
1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Decomposing the Decline
in A/N into A/E and E/N
Ratio of Europe to the United States, Ratio of Output per Capita to Output per Hour,
Decomposed into Hours/ Employee and Employee/Population Ratios, selected
years, 1870-2000
120
Employees/Population
Output PC/Output PH
Percent
110
Hours/Employee
100
90
80
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
The Basic Irony: Europe
Catches Up in Productivity
by Cutting Hours per Capita
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Making Labor Expensive to Hire with High
Minimum Wage and High Payroll and Social
Taxes on Labor
Pushes Firms Back up the Labor Demand
Curve
– Hours are Cut
– Marginal and Average Product of Labor are
Raised
– Shortage of jobs, esp. low-skilled job
Standard of living: held
down by vacations (H/E)
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Have citizens chosen to use their
prosperity to take longer vacations in
contrast to Americans?
Have Europeans been forced to take
vacations because of union or
parlimentary politics?
Not Just Vacations, Short Work Weeks
– The French Hours Police
Europe’s Low E/N Matters
as much as Low H/E
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High Unemployment
– High Youth Unemployment
– High long-term Unemployment
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Low Labor-force Participation
– Of Youth
– Of Elderly
– Average retirement age in France is 58
Social Consequences
of Low E/N
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Lack of Job Opportunities for Youth:
– Late Development of Independence
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U. S. Youths working in High School and
College
Consequences for Adults
– Late Marriage Ages
– Low Fertility Rates
– Italy: Living at Home with Mama
Phelps: Corporatism in EU,
Competition in U. S.
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Corporatism: “penalties, impediments,
prohibitions, mandates” that dampen
“creative destruction”
– Does this sound familiar, Indians?
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Youth in Europe, culture of “dependency”
European youth expect college education for
free
American teens develop independence at
age 16 by working at McDonalds
American college students work and borrow
to pay part of their college expenses
Arc de Triomphe in every
U. S. City?
Is Q/N Exaggerated?
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Three categories of reasons
– Excess Energy Use
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Harsh Climate, Air conditioning
Low petrol taxes, high petrol use
Overly dispersed metro areas, more energy use
– Low density means commuting congestion
– 2m people in prisons, wasted lives and resources
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U. S. Medical Care Inefficiency
– Medicare Financing Crisis
– Lack of universal health insurance
– Defined benefit pension plans and retiree
medical costs hurt “legacy” firms
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General Motors vs. Toyota
Summarizing Welfare
Comparison
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Started with Europe/ US Ratios
Q/N 77
Q/A 93
One-third of A/N difference is
voluntary
Q/N 82
Q/A 93
One-half of remaining YPC difference
disappears because U. S. GDP is
overstated
Q/N 91
Q/A 102
The New Productivity
Growth Divergence:
1995-2003
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Growth rates of GDP per Hour Worked
– U. S. 2.3
– Europe 1.2
– Difference 1.1
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Over eight years, causes Europe/US
productivity ratio to fall back from 94
to 85 percent
The U. S. Productivity
Growth “Explosion”
LP Actual vs Trend
6.00
5.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
Basic Paradox about IT
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Both Europe and U. S. Rapidly Adopted New
Economy Technology in late 1990s
– Personal Computers
– Web Access
– Mobile Phones
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But Europe hasn’t taken off
Conclusion: Role of IT in U. S. revival must
have been exaggerated
Finding the Culprit Industries
Output per Hour by Industry Group, EU and US, 1990-2003
12.0
10.0
8.0
US ICT Pro
6.0
EU ICT Pro
US ICT Using
EU ICT Using
4.0
US Non-ICT
EU Non-ICT
2.0
0.0
1990-1995
-2.0
1995-2001
Where is the Difference?
The Van-Ark Decomposion
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55% retail trade
24% wholesale trade
20% securities
Rest of the economy: ZERO
U. S. negative in telecom,
backwardness of mobile phones
Europe in Retailing
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Not uniform – Carrefour, Ikea
U. S. “Big Boxes” (Wal-Mart, Home Depot,
Best Buy, Target)
Europe:
–
–
–
–
Land-use regulation, planning approval
Shop-closing restrictions
Protection of central-city shopping precincts
The MIX of retailing heavily skewed to oldfashioned small retail units
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Paris drug stores vs. Walgreens
Explanations of Rapid U. S.
Productivity Growth: 20002003
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Unusual degree of downward pressure on
profits
Intangible capital became important after
ICT boom
– Productivity benefits of ICT investment could
have been delayed
– Mismeasurement of timing of productivity
growth
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Questions: Profits are now booming,
shouldn’t productivity effect go away?
Productivity growth <2.0% 04:Q3 + 04:Q4
Lessons for India from
Comparing EU and US
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First, We Must Qualify This Heavily
– Nothing in EU or US remotely comparable to the poverty
population in India.
– Indians on their own in policies to reach that “last mile”
into the rural villages
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Corporatism vs. Competition: India is the Expert on
Corporatism
– India also knows about small traditional retailing
– India is an expert on land-use planning, a key explanation
of why Europe has lagged behind US in retail productivity
growth
– Encourage Development of Large-Format Retailing
Lessons, Part II
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A Subtle Conclusion about Infrastructure
– France Has Better Infrastructure than US
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Freeways = US Interstate Highways
TGV
Paris: metro, RER, busses (with electronic signs)
But France has slow Economic Growth
Conclusion: Infrastructure is neither
necessary nor sufficient for econ growth
More Thoughts
About India
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“India is Long on Engineering
Graduates and Short on Roads”
Divert Resources by developing an
educational opportunity bank, make
ugrads borrow, then repay contingent
on future income
Put freed resources into primary,
secondary education
Final Thoughts
About Infrastructure
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Why Should the Government Raise its Fiscal
Deficit to Finance an Airport?
The World is Waiting to Develop India’s
Airports
– The Big 3: BAA, Schipol, and FRAPORT
– Paraphrasing Churchill 1941 (“give us the tools
and we will finish the job”)
– Give us the land and we will build your airports